Magazine

Does Waiting to Start a Family Save You Money?

By Sallie Krawcheck

April 6, 2017

When should I have a baby? That’s a question many women ask
themselves…or Google. (Around 350 million results pop up when you
do.)

There is certainly no shortage of opinions out there: There’s the “You
want to have a baby early because of your figure/eggs/etc.” brigade. And
the “Do you want to use a walker at your kid’s college graduation?”
posse. And let’s not forget the “Focus on your career now and you can
worry about starting a family later” crew. Big sigh.

There is, of course, no simple answer. Add to that, for some moms —
especially new ones — starting a family can involve taking a career break
to spend time at home with baby. I did it — I actually quit (flat out,
quit) my job as an investment banker when I became pregnant with my son
because I couldn’t fathom carrying him to term while working those crazy
hours, let alone raising him.

Almost 30% of women saw a pay cut after a career break, and most of those women took a pay cut of 20% or higher.

Frustratingly and, in my opinion, shamefully, these types of career
breaks come with really big financial trade-offs. Because once you return
to work, your
salary typically takes a hit. Still speaking from experience here.
When I came back to Wall Street after taking time off to have my son, I
took a 60% pay cut. (It worked out in the end because I found a job I
enjoyed much more than investment banking, but still…)

We talk a lot about the cost
of a career break here at Ellevest. Which is why, in a moment that
would make Carrie Bradshaw proud, we couldn’t
help but wonder: How much do the costs associated with taking a
career break to raise a baby vary depending on the mom’s age? We decided
to dig into the numbers ourselves.

Meet Nadia

Nadia’s 28 years old, making about $60,000 a year at her job, and is
about to have a child. A couple of weeks into her maternity leave, Nadia decides that she isn’t ready to say bye to her baby and go back to work just yet.

Instead, Nadia decides to take two years off to raise her baby. Sure, she
knows money will be tight since she and her partner are going from a
two-income household to a single-income one, but after a lot of back and
forth, she’s on board with being a stay-at-home mom…for a spell.

Two years fly by, and Nadia decides to go back to work. Luckily for her,
she gets a full-time job — the only downside is that she’s taking a 20%
salary cut. (This 20% isn’t random, by the way; a 2015 Ellevate Network
survey found that almost 30% of women saw a pay cut after a career break,
and most of those women took a pay cut of 20% or higher.)

So Nadia will be making $45,000 when she starts working again — less than
what she was making as a 23-year-old. Her salary was $50,000 back then.

Ouch.

What makes the pay cut even worse is that it sets off a ripple effect,
causing Nadia to lose out on significant earnings over the course of her
career, as she gets her future raises off of this lower level of earnings.

Just how significant is this, exactly?

When Nadia retires at 70, she will have missed out on about $1.8 million
in earnings because of that career break.* (Ouch
doesn’t even come close. Not even close.)

Ok, so maybe Nadia loses out on so much money because she has a kid early
on in her career. It sounds plausible — she’s less established, only has
a handful of years of full-time work experience…so maybe we can
chalk up her $1.8 million in lost salary to that.

What if she waited a little longer to start a family?

Meet Gabby

Gabby’s 35, making around $100,000, owning her career, and ready to start
a family. Early on in her pregnancy, Gabby decides that she’s going to
take time off from work to raise her baby.

Fast-forward two years filled with countless sleepless nights, thousands
of diapers, numerous Facebook status updates, and Gabby is ready to
become a working mom. Just like Nadia, she’s welcomed back to the working
world with a full-time job offer…and a 20% pay cut off of her
pre-break six-figure salary.

So Gabby is making just under $80,000, which is less than she was making
seven years ago. (Sensing a theme here?) And this means that by the time
Gabby stops working at age 70, she will have missed out on a little under
$1.6 million over her career.* Not as bad as Nadia’s $1.8 million, but
let’s be real, $1.6 million isn’t chump change.

But hey, if we have to look for the aluminum foil lining here, maybe we
can say that this is a step (albeit a pretty small,
blink-and-you’ll-miss-it one) in the right direction. So here’s a
hypothesis: Maybe a career break ends up costing you less if you put it
off as long as possible? Let’s test that.

Meet Christine

Christine’s 40 years old, makes a little over $130,000 a year, and is
having a kid. After spending 18 years working non-stop and climbing the
corporate ladder, Christine decides, “Hey, I’m going to take the next two
years off and embrace the stay-at-home mom life.”

When two years is up, Christine goes right back to work. And…you
guessed it…she takes a 20% pay cut off of that $130,000, so she’s
making a little over $100,000. Which means that by the time she retires
at age 70, her career break will end up costing her just over $1.6 million.*

That’s right — Christine loses out on roughly the same amount of money as
Gabby. You’d think that because Christine earns more and waited longer to
have a baby and take time off, her career break would have cost her less.
(Like how Gabby’s break cost her slightly less than Nadia’s.)

But unlike Gabby, Christine is close to her salary peak when she takes
her career break. Wait, what do we mean by salary peak? This is when your
salary reaches its highest point in your career. Women’s salaries tend to
peak around age 40 whereas men’s generally peak around 55. Yeah, we hate
it too.

As a result, that 20% pay cut combined with a shorter window for making
money once she goes back to work — she has 28 years left until retirement
while Gabby has 33 — really ends up hurting Christine.

So much for our hypothesis.

Closing the Gap

The main takeaway? There’s no universal “right” age for having a baby and
taking a career break. Whether you’re young and just starting out in your
career or you’re more established and taking home a hefty paycheck, the
money you can miss out on by taking a career break is significant. Which
means that after taking a break, there’s less money for all of the
expenses (and boy are there a lot of them) that come with kids — and less
money for you in general.

The truth is raising kids is very expensive — the USDA estimates that a
middle-class married couple could expect to spend $233,000
to raise one kid, just one, to age 17. You can bet that
number doesn’t include music lessons, sports leagues, summer camps, etc.
Oh, yeah, and it definitely doesn’t factor in college — the biggest
big-ticket item of them all.

That’s why it’s important to plan for a career break as much as possible.
I’m not just talking about bulking up your savings so that they can cover
your living expenses during your work hiatus. That’s great, and you
definitely should do it — but that’s only a short-term financial solution.

You should also find ways to keep your skills fresh so that you’re ready
to dive right back in when you return to work. A key reason women take
pay cuts when they return to work is because employers suspect that
their skills haven’t kept up with the fast-paced changing nature of
business. Freelancing or working part-time can help you do double duty:
earn you some extra income and fill in your resume. Volunteering and/or
blogging about your area of interest are other options for avoiding gaps
in experience, too.

As for the long term, you still need a solution to help you try and close
the earnings gap you get from taking a career break. Because as we see
with Nadia, Gabby, and Christine, the 20% pay cut keeps affecting your
future salary year after year after year once you return to work.

The good news? (Finally, I know.) Investing regularly in a diversified
investment portfolio while you are working may help you make up the
hundreds of thousands, or millions, you could lose to a career break. It
may also help you set yourself up for the retirement of your dreams. And,
believe me, you deserve it. You worked hard, mom’d just as hard, and we
don’t think you should retire with less money because you decided to
spend time at home raising a future bad-a$$. If anything, you deserve more.

We project Nadia's salary with and without a career break, using a
women-specific salary curve that includes inflation from Morningstar
Investment Management LLC, a registered investment adviser and subsidiary
of Morningstar, Inc. We start Nadia at age 23 with a salary of $50k, assume
she takes a 2-year career and returns to a job paying 20% less than her
salary at the time she takes the break. We add up her annual salary amounts
under both scenarios over a 40-year period. $1.82M is the difference
between the two sums.

We project Gabby's salary with and without a career break, using a
women-specific salary curve that includes inflation from Morningstar
Investment Management LLC, a registered investment adviser and subsidiary
of Morningstar, Inc. We start Gabby at age 30 with a salary of $85k, assume
she takes a 2-year career break in 5 years, and returns to a job paying 20%
less than her salary at the time she takes the break. We add up her annual
salary amounts under both scenarios over a 33-year period. $1.58M is the
difference between the two sums.

We project Christine's salary with and without a career break, using a
women-specific salary curve that includes inflation from Morningstar
Investment Management LLC, a registered investment adviser and subsidiary
of Morningstar, Inc. We start Christine at age 35 with a salary of
$120,000, assume she takes a 2-year career break in 5 years, and returns to
a job paying 20% less than her salary at the time she takes the break. We
add up her annual salary amounts under both scenarios over a 28-year
period. $1.63M is the difference between the two sums.

The projections of various investment outcomes are hypothetical in nature,
do not reflect actual investment results, and are not guarantees of future
results.

Information was obtained from third party sources, which we believe to be
reliable but not guaranteed for accuracy or completeness.

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recommendations, does not constitute a solicitation to buy or sell
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